On October 4, 2023, University of Pennsylvania Leonard Davis Institute of Health Economics (LDI) Executive Director Rachel M. Werner, MD, PhD, testified at the Pennsylvania House of Representatives Subcommittee on Health Facilities about the impact widespread hospital consolidations are having on the financial outcomes, quality, and access to care throughout the U.S. healthcare system. In her presentation, she summarized the evidence that consolidation increases commercial healthcare prices, with no positive effects on quality and potential deleterious effects on access.

Views expressed by the researchers are their own and do not necessarily represent those of the University of Pennsylvania Health System (Penn Medicine) or the University of Pennsylvania.

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PA House Health Committee Hearing
October 5, 2023
Testimony submitted by:

Rachel M. Werner, MD, PhD
Executive Director, Leonard Davis Institute of Health Economics
Robert D. Eilers Professor of Health Care Management and Economics
Professor of Medicine
University of Pennsylvania

Chairpersons Frankel and Rapp, distinguished Committee members, staff, and fellow panelists, thank you for the opportunity to submit written testimony today on this important topic of hospital consolidation and closure. My name is Rachel Werner. I am a general internist and a health economist and have been studying the health care sector, and specifically the effects of health care payment and financing on quality and access, for over 20 years. I am a Professor of Medicine and of Health Care Management and Economics at the University of Pennsylvania. I am also the Executive Director of Penn’s Leonard Davis Institute of Health Economics. I am testifying in my own capacity and the views expressed here today do not necessarily represent those of the University of Pennsylvania Health System or the Perelman School of Medicine.

A substantial number of United States (U.S.) hospitals have closed in recent years, averaging 21 hospitals per year between 2010 and 2015,¹ with 47 closures in 2019 alone. Closures have been particularly pronounced in rural areas. Between 2010 and 2022, 143 rural hospitals closed — 19 of which occurred in 2020.^2,3 This trend in closures has accelerated with the financial stressors that hospitals experienced during the COVID-19 pandemic. And now, hospitals are facing an additional challenge — rising costs for labor, supplies, and drugs, pronounced workforce shortages, sicker patients and longer hospital stays, increasing the financial pressures on U.S. hospitals.

My goal is to provide an overview of trends in markets for and investment in hospitals, including consolidation, private equity acquisition, and privatization and, for each, how we understand the impact of these changes on financial outcomes, quality, and access to care.

Consolidation

There are two main types of consolidation – horizontal and vertical. I will limit my comments today to horizontal consolidation, or when a hospital (or hospital system) merges with another hospital (or hospital system), typically in the same market.

There were 1887 hospital mergers announced between 1998 and 2021, according to the American Hospital Association. Those mergers reduced the number of hospitals from about 8000 down to around just over 6000. As a result of these mergers, the number of independent hospitals declined. By 2017, two thirds of all hospitals were part of a larger system, as compared to 53% in 2005.⁴

Effect of consolidation on prices, quality, and access

Effect on prices

The effects of horizontal mergers on prices are pretty clear. Research suggests that hospital consolidation leads to higher prices for commercially insured patients. Hospital market power is one factor that affects prices.⁵ For example, one study found that hospitals that do not have any competitors within a 15-mile radius have prices that are 12.5% higher than hospitals in markets with three or more competitors.⁶ The study also found that when two hospitals within five miles of one another merged, it resulted in an average price increase of 6% or more.⁶ A similar study found that mergers of two hospitals in the same state led to price increases of 7% to 9%, even when hospitals were not in the same market (see more on cross-market consolidation below).⁷ These price increases are generally thought to be due to increased market power after merging.

Effect on quality

The evidence on the effect of consolidation on quality of care is mixed, but a fair amount of evidence suggests that quality of care may be worse in highly consolidated markets compared to markets with more competition. One study found that risk-adjusted mortality for one year after a heart attack was 4.4% higher in more consolidated hospital markets compared to less consolidated markets.⁸ Another study found that patients in areas with a more concentrated cardiology market had worse health outcomes for hypertension and heart attacks.⁹ A 2020 study found that in the three years after a hospital was acquired, there was no improvement in
patient outcomes, including 30-day readmission and mortality rates. This study also found that patient experience of care worsened slightly after a merger, with patients reporting they were less likely to recommend the hospital and doctors’ and nurses’ communication was worse.¹⁰

Effect on access

There is less evidence of the effect of hospital consolidation on access to care. A recent study examined this question, finding that as hospital markets became more consolidated, fewer Medicaid enrollees were admitted to the hospital compared to overall number of patient admissions. This effect was particularly pronounced for labor and delivery admissions, the most common reason for Medicaid admissions.¹¹

Approaches to addressing consolidation

There are a number of potential state actions that could limit hospital consolidation and, once mergers occur, the ill-effects of consolidation.

States can serve as another potential check on anti-competitive mergers and can sue under federal anti-trust law and enforce their own laws. A recent review of state anti-trust enforcement in health care identified several practices that support robust enforcement,¹² including adequate notice requirements for potential mergers and waiting periods for state reviews and establishing criteria for merger review and the ability to conduct a full analysis of economic and health care implications.

Once a merger has taken place, State attorneys general can prohibit anti-competitive practices. This can include pursuing anti competitive actions that prevent insurers from providing information to enrollees about more or less expensive providers, or from providing incentives to enrollees to go to less expensive providers (e.g., anti-tiering, anti-steering, and gag clauses).

States can also promote competition and consumer choice through benefit design and by improving the transparency of hospital price and quality. Additionally, states can limit the effects of consolidation on commercial prices by establishing caps on provider prices or using all-payer rate setting.

Finally, policymakers and regulators should consider potential impacts of consolidation on care and access for Medicaid patients, in particular, when reviewing mergers or developing policy responses to hospital concentration. Additionally, as Medicaid patients are more likely to receive care at public hospitals, investing in the public hospital systems and the safety net may be warranted in response to increasing market concentration.

Cross-market Consolidation

While the prior review has focused on the effects of within-market hospital consolidation, there has been a growth in cross-market consolidation that is noteworthy. There have been a large number of mergers and acquisitions between hospitals and health systems that operate in different regions. A noteworthy recent example in Pennsylvania is the announced plans for Kaiser Permanente (operating in five states in the Western U.S., Georgia, Maryland, Virginia, and DC) and Geisinger (operating in Pennsylvania) to merge.¹³

Cross-market mergers are becoming increasingly common. In one recent study, about 1,500 hospitals were targeted for merger or acquisition between 2010 and 2019 and most of these deals (55%) involved hospitals or health systems in a different market.¹⁴ In another study, one in eight rural hospitals merged with an out-of-market hospital or health system between 2010 and 2018.¹⁵

Even when a hospital merges with a hospital in a different geographic area, some studies suggest that the merger can impact competition and prices. Research has estimated that cross-market mergers have led to price increases ranging from 6 to 17 percent.^7,16,17 One reason that prices rise when hospitals merge across markets is that these mergers increase the acquired hospital’s bargaining positions with insurers, which seek to have strong provider networks across multiple areas in order to attract employers with employees in multiple locations. Additionally, through network negotiations with insurers, large hospital systems can shift volume to higher cost facilities. For example, hospital systems may require that insurers include all hospitals in their system in a provider network if the insurer wants any hospitals included. This can lead to higher cost hospitals being in a provider network even when there are lower cost hospitals nearby.

Cross-market mergers could also reduce access to care. This is particularly a concern for cross-market mergers involving rural hospitals. Some research suggests that when a large health system acquires a small rural hospital, the rural hospital may become less responsive to community needs and more willing to eliminate some service lines, such as obstetric care.^18,19 Hospitals may also reduce spending on community benefits after being acquired by a health system.²⁰

Historically, cross-market mergers have not received much scrutiny. However, more recently, the Federal Trade Commission has identified these types of deals as an area of interest and has begun investigating some cross-market mergers.

Some states, such as California, have used their legal authority to impose conditions on cross-market deals,^21-23 including restricting price increases and requiring merged hospitals to maintain certain services, including obstetrics. Others, such as Minnesota, have investigated whether to challenge proposed cross-market mergers. In addition, regulators could prohibit certain types of clauses in contracts between hospitals and insurers that limit their ability to leverage market power to negotiate for higher prices in one market based on their strong position in another.²⁴

Private Equity Acquisition

Acquisitions of hospitals and health systems by private equity (PE) firms has soared over the past decade, sparking debate about the growing influence of PE in U.S. health care and how it might affect costs, quality, and access. These firms typically invest in businesses by taking a majority stake with the goal of increasing the value of the business and potentially selling it at a profit. Private equity firms often sell their investments within three to seven years, so they may have a short time horizon for evaluating investments in improving acquired firms.²⁵

In 2010, there were 325 PE deals in health care in the U.S. By 2021, that number was well over one thousand. PE firms have invested nearly $1 trillion through thousands of deals to acquire hospitals and specialized practices in the past decade.²⁶ In 2017, 11% of inpatient admissions were to a facility that had experienced PE ownership at some point.²⁷

PE investment may have benefits for the acquired firm. These investments create value for companies by providing access to capital to support infrastructure improvements like IT systems and new facilities, leveraging economies of scale, and ensuring that firms have adopted managerial best practices. However, critics worry that PE’s focus on maximizing returns results in lower quality, lower staffing, and lower access to care. Critics also question whether the short lifecycle of PE funds (of seven to ten years) decreases the investment made in the communities and patients that hospitals serve. Some have raised concerns that PE firms are skilled at exploiting loopholes in existing regulations to maximize their profits.

Effect of private equity acquisition on financial outcomes, quality, and access

Financial outcomes

While media headlines have reported bankruptcy filings among PE-acquired hospitals, including Hahnemann Hospital in Philadelphia, research has not found evidence to support that PE acquisition causes widespread financial instability after a hospital is acquired by a PE firm. In one study, hospitals on average actually improved their financial performance after being acquired by a PE firm. When compared with similar hospitals in the same market, PE-acquired hospitals increased their operating margins by nearly two percentage points, an improvement that came from both cutting operating costs and increasing revenues. On the cost side, hospitals acquired by PE firms decreased staffing (both overall and specifically for nurses) but also found other ways to become more efficient, amplifying the gains they achieved from staffing changes alone^.28 Another study found that PE buyouts led to an 11% increase in healthcare spending, driven by higher prices at PE-owned hospitals and price spillovers to other hospitals in the same market.²⁹ Other work found that PE-acquired hospitals had larger increases in net income, charges, and charge to cost ratios.³⁰

Quality

Acquisition of hospitals by private equity was associated with improvement in some quality measures relative to nonacquired controls.³⁰ The aggregate quality score for acute myocardial infarction and pneumonia both increased (by 3.3% and 2.9% respectively) though the aggregate score for heart failure did not differentially change. Another study found that PE acquisition was associated with lower inpatient and lower 30-day mortality (by 1.1 to 1.4 percentage points) among patients admitted with acute myocardial infarction and no differences in other dimensions of quality or in other medical conditions.

Access

At a patient level, there is no evidence at present that shows that PE-acquired hospitals engaged in cherry-picking of healthier patients. The impact of PE acquisition of hospitals on access to care for low-income and Medicaid-enrolled patients is not known, though there is some evidence that PE-acquired hospitals are more likely to engage in surprise medical billing.³¹

Likewise, there is no strong evidence that PE acquisition is associated with a reduction in unprofitable service lines. In one study, compared to non-acquired hospitals, PE acquisition was associated with a higher probability of adding some profitable hospital-based services (interventional cardiac catheterization and hemodialysis), profitable technologies (robotic surgery and digital mammography), and freestanding or satellite emergency departments. It was also associated with an increased probability of providing services that were previously categorized as unprofitable (for example, mental health services).³² Some evidence does
suggest that PE-acquired hospitals appear to shift their focus from outpatient care to more lucrative inpatient care services, possibly reducing access to outpatient care.³³

Effect of private equity acquisition on consolidation

Ongoing monitoring of the direct effects of PE on hospital finances, quality, and access is vitally important. Equally important are the indirect effects of PE through its impact on consolidation. While evidence of consolidation due to PE acquisition in the hospital sector is scant, in the setting physician practices, there is evidence that PE acquisition is increasing consolidation. The pace at which PE firms are acquiring small practices is increasing.³⁴ These acquisitions represent a small share of practices overall, when considering all medical practices in the United States. However, PE acquisition of small firms can lead to more consolidation over time, as PE firms often continue to acquire additional nearby practices,³⁵ and this series of small acquisitions results in market consolidation. However, because each individual acquisition is small, it is often not scrutinized. As noted above, the increasing consolidation can lead to commercial higher prices with no positive effects on quality and potentially deleterious effects on access.

Approaches to addressing private equity acquisition

While evidence to date of the negative effects of PE acquisition on hospitals is limited, ongoing monitoring of these effects is important given that the profit-focused motivation of PE firms may not align with improvements in patient health and outcomes or with investment in communities.

States have a number of potential levers to limit the effects of PE acquisition of hospitals. These include scrutinizing and closing loopholes that create opportunities for PE firms to profit at the expense of patient welfare. Example of such loopholes include surprise billing or perverse incentives that may adversely impact the affordability, quality, and access to care.

Regulators should monitor small acquisition deals under the $101 M limit – deals that often avoid scrutiny but, when added together, lead to consolidation.

States can require better transparency and reporting of PE deals and the terms of those deals, which would allow closer monitoring and accountability of the impacts of PE acquisition on hospitals and the patients and communities they serve.

Privatization

Finally, it is worth noting that privatization of public hospitals may have deleterious effects on quality and access of care, even while helping maintain a hospital’s financial stability. Privatization is when private companies (either for-profit or not-for-profit) acquire a previously government-run hospital, converting a publicly financed hospital to a privately financed one. Public hospitals are often important providers of safety-net care for individuals who are uninsured or insured by Medicaid. Although public hospital beds only account for 4% of all hospital beds in Pennsylvania, the trend toward privatization of public beds represents a larger trend focused on profitability of health care over quality and access.

Many hospitals have moved from public financing to private hands over the past decades. The share of hospitals owned and operated by a government body declined by 42% from 1983 to 2019.³⁶ On one hand, this trend might improve the profitability (and thus stability) of hospitals as revenue per patient increases. At the same time, it could have deleterious effects on patients’ access to hospital care, particularly for patients who are uninsured or insured by Medicaid.

One recent study examined this issue, examining the consequences of 258 hospital privatizations from 2000 to 2018 across the U.S.³⁷ They found that after a private company took over a hospital that was previously public, the hospital became more profitable, increasing patient revenues sufficiently so that the hospitals shift from losing money to generating a modest surplus.

But they also found that access to care declined, observing a decline in overall patient volume by 8.4%, which was largely driven by a decline in Medicaid admissions. While there was a decline in admission for Medicare patients, it was smaller and hospitalizations for Medicare patients appeared to be absorbed by neighboring hospitals. On the other hand, there was an overall decline in hospitalizations for Medicaid patients across the market, which likely reflects a decline in access to care.

The mechanism of these declines in Medicaid access is unknown, but could be due to hospitals declining to renew Medicaid contracts; insurers taking a hospital out of the Medicaid network; or privatized hospitals cutting service lines used by Medicaid-insured patients, such as mental health.

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